Here's What We Like About Cognizant Technology Solutions' (NASDAQ:CTSH) Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Cognizant Technology Solutions Corporation (NASDAQ:CTSH) is about to go ex-dividend in just 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Cognizant Technology Solutions' shares on or after the 20th of August will not receive the dividend, which will be paid on the 28th of August.

The company's next dividend payment will be US$0.30 per share, on the back of last year when the company paid a total of US$1.20 to shareholders. Last year's total dividend payments show that Cognizant Technology Solutions has a trailing yield of 1.6% on the current share price of US$74.38. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Cognizant Technology Solutions has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Cognizant Technology Solutions

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Cognizant Technology Solutions paid out a comfortable 27% of its profit last year. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 37% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that Cognizant Technology Solutions's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Cognizant Technology Solutions, with earnings per share up 4.2% on average over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last seven years, Cognizant Technology Solutions has lifted its dividend by approximately 10% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Is Cognizant Technology Solutions an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Cognizant Technology Solutions is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Cognizant Technology Solutions is being conservative with its dividend payouts and could still perform reasonably over the long run. Cognizant Technology Solutions looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Cognizant Technology Solutions for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with Cognizant Technology Solutions and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.